With interest rates falling, we often expect business growth to follow. However, many companies continue to close their doors. The latest statistics from the Insolvency Service highlight this trend: “After seasonal adjustment, the number of registered company insolvencies in England and Wales in April 2024 was 2,177, 18% higher than in March 2024 (1,838) and 18% higher than the same month in the previous year (1,838 in April 2023).”
As always, business activities have tax implications, and this is no different when a business fails. Let’s delve into the key tax considerations when facing company closure.
Immediate Impact: Cessation of Trade
When a business ceases trading, this accelerates the timeline for paying its tax liabilities. Any expenses incurred after the cessation of trade (post-cessation expenses) can be offset against post-cessation receipts or, in some cases, relieved as losses against total income or chargeable gains.
Managing Losses
Efficiently handling losses is crucial. The primary reliefs to consider include offsetting cessation losses:
- Against the company’s other profits for the same period.
- By carrying them back against total profits of the previous period.
- By carrying back losses arising in the final 12 months before cessation against total profits within the previous three years on a ‘last in first out’ basis.
Sale of Assets
Cessation of trade typically results in a deemed disposal of any plant and machinery for capital allowances purposes. Selling a company’s chargeable assets can also lead to capital gains and significant tax liabilities, especially for property sales. Effective tax planning may involve selling assets before the cessation of trade, allowing any losses to offset the corporation tax bill. If selling before cessation isn’t feasible, consider selling the asset to the owner-shareholder and renting it back to the company. However, this approach incurs stamp duty land tax (SDLT).
Alternatively, the company could make an ‘in-specie distribution’—essentially a dividend comprising the asset. The market value is treated as a taxable distribution for the shareholder, who will then pay personal tax at their marginal dividend tax rate, but no SDLT applies.
It’s important that assets are not sold at undervalue. Courts can reverse such transactions if they occurred within two years before liquidation unless made in the reasonable belief that the company could continue trading.
Handling Distributions
Payments to satisfy directors’ loans should be avoided as these would be deemed ‘preferential treatment’, favouring directors over other creditors. However, a company might still have surplus funds after paying all creditors, enabling distributions to shareholders.
Distributions made during company dissolution are treated as ‘capital distributions’ and are subject to capital gains tax, provided certain conditions are met. Broadly, distributions treated as capital and taxed at 10% under Business Asset Disposal Relief are available if the total amount distributed to shareholders is less than £25,000. Exceeding this amount means shareholders pay income tax at dividend rates (8.75% for basic rate, 33.75% for higher rate, or 39.35% for additional rate taxpayers), considering the £500 dividend allowance for 2024/25 and any personal allowance.
To ensure capital treatment, companies distributing more than £25,000 must undergo formal liquidation.
Practical Advice
Navigating the tax landscape during company closure can be complex. For personalised guidance on managing the tax implications of business failure, contact Jon Davies Accountants today. Our expert team is ready to assist you in making informed decisions to optimise your financial outcomes during challenging times.
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